Question

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

A. vertical line at 0.
B. horizontal line at the world real interest rate.
C. line that slopes up and to the right.
D. line that slopes down and to the right.

Answer 1

Answer: B. Horizontal line at the world real interest rate.

Step-by-step explanation:

For an open economy with perfect capital, goods and services are traded with the other parts of the world. Remember net capital out flow is measured along the horizontal axis, which is the money being invested overseas. The net capital outflow is said to be equal to national savings - domestic investments.

The net outflow is drawn as the horizontal line at the world real interest interest rate.

Answer 2

B) horizontal line at the world real interest rate.

Step-by-step explanation:

An open economy is an economy where goods and services are traded with the rest of the world. The net capital outflow is the money being invested overseas and it equals = national savings - domestic investment. In macroeconomics, savings = total investment.

Another way to calculate net capital outflow is:

net capital outflow = money domestic investors invest in foreign countries - money that foreign investors invest in the country.

In an open economy, the interest rate will be equal to the world's interest rate.